1 - Nature and objective of accounting

Question 1

what are the types of business entities

Answer 1

1. SOLE TRADER = owned and managed by one person, receives all benefits and is liable
2. PARTNERSHIP = owned and managed by two or more people, profits shared between partners and are equally liable
3. LIMITED LIABILITY COMPANY = owners and managers are separate, liabilities are separate, shareholders aren’t sued for business debts

Question 2

what is bookkeeping

Answer 2

recording of monetary transactions in a business

Question 3

what is accounting

Answer 3

process of recording, analysing and summarising the transactions of a business

Question 4

what do financial records need

Answer 4

• to be maintained for all transactions
• contain complete, accurate and valid information
• final accounts based on business’ financial records

Question 5

what is the main purpose of financial statements

Answer 5

‘to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions’

‘these financial statements should also show the results of the managements stewardship of the resources entrusted to it’

Question 6

who are users of financial statements?

Answer 6

INVESTORS = to assess performance, how much profit they can gain
MANAGERS OF BUSINESS = to plan ahead
CUSTOMERS = to know its a secure source of supply, limited risk of going bust etc
SUPPLIERS = know its ability to pay debts, security
LENDERS = able to meet interest payments and repayments
TAX AUTHORITIES = assess tax payable
GOVERNMENTS AND THEIR AGENCIES = require info for national stats
THE PUBLIC = enterprise gives them jobs, can supply products and affect the environment

Question 7

where are financial statements registered

Answer 7

Registrar of Companies

Question 8

purposes of management and financial accounting

Answer 8

FINANCIAL = preparing accounting reports for external use
MANAGEMENT = preparing accounting reports for internal use

Question 9

difference between the work produced by management and financial accountants

Answer 9

MANAGEMENT:
- split between departments of a company
- forward looking info to prep budgets and make decisions
- compare actual performance with budget and take corrective action

FINANCIAL:
- summarising historical data
- financial statements prepared under constraints (International Financial Reporting Standards and company law), doesn’t apply to management consultants

Question 10

what is the separate entity concept

Answer 10

a business must be treated as being separate from its owners
applies whether the business is recognised in law as being a separate entity or not

personal transactions must not be mixed with business transactions, applies to all businesses